28 November 2013

Thomas Laqueur reviews The Sleepwalkers: How Europe Went to War in 1914, by Christopher Clark:

Many actors (the crowned heads of Europe, military men, diplomats, politicians and others), each with their own objectives, acting as rationally and irrationally as humans are wont to act, made decisions that foreclosed on others and collectively led the world into an unimaginable and un-imaged war. Some damn foolish thing, Thomas Laqueur, 'London Review of Books', dated 5 December

Millions of ordinary people had a vital interest in World War One not happening. Even when multiplied by what might have been thought a very low probability of its actually occurring, this should have represented a strong coalition in favour of peace. But there was no way this overwhelming wish for peace could have expressed itself. In those days the disconnect between policymakers and ordinary people was even wider than it is now. Calamitously, war broke out as the accumulated result of the perceived short-term interests of a tiny group of monarchs, aristocrats and generals.

The situation hasn't changed that much. Short-term goals predominate still amongst politicians and the military. Corporations have more power than monarchs and aristocrats these days, but are at least as adept at ignoring or manipulating public opinion. To paraphrase Otto von Bismarck: it's no stretch to imagine a catastrophic war breaking out nowadays over some damn fool thing in the East China Sea, or the Korean peninsular or the India/Pakistan border or ....

One way of making effective our wish to avoid another calamity would be to issue Conflict Reduction Bonds. Governments, philanthropists, NGOs or ordinary members of the public could all contribute to the funding of such bonds, which would be redeemable only after a sustained period of no major political conflict. In so doing, we would monetise our wish for peace, and act as a counterweight to the forces that, deliberately or not, propel countries into catastrophic wars or civil wars. There's nothing inevitable about war: it happens because people react, if not rationally, at least humanly, to the incentives on offer. Conflict Reduction Bonds, by rewarding people for achieving peace, could tip the scales in the other direction, and lead to what must surely be one of mankind's most noble goals: the ending, for all time, of war.

19 November 2013

It's not just that our western democratic governments stand apart from ordinary citizens, but that the gap grows every larger. Jim Newell writes about a US Senator, Jim DeMint, who is retiring to head up a think tank:

The whole curious DeMint affair bespeaks the ongoing shift of power in
Washington away from the people’s business—and toward the ideological
donor class.... At places like CAP, AEI, Heritage, and many of the other approximately
1,812 American think tanks, policy studies are still part of the
operation, but their most vital public role is to act as partisan hacks
for whichever side of the major-party duopoly they’re associated with.
And the conservative think tanks are now reliable dispensers of
ideological discipline on the right: they do exactly what is best in the
short term for the Republican Party at all times and punish anyone who
dissents. Good Enough for Government: WorkConservatism in the tank, Jim Newell, 'The Baffler', No. 23

Perhaps this sort of patronage-based corruption is built into any sort of policymaking system with which ordinary people cannot identify, whether that happens because government is too big, too remote, or its machinations too obscure. A government acting on a large scale need not necessarily be remote from or unconcerned with the well-being of its citizens. There are essential projects that require such a government: sanitation for example, or other major infrastructural works. But it does seem to be inevitable that interest groups, including big business and government agencies, interpose themselves between people and their government taking advantage of public funds in ways that are damaging to the public interest, self-enriching and therefore - because money buys votes - self-entrenching. Once that happens, elections become ever less meaningful; ordinary people become alienated from the political process and cynical. Or worse.

One way of reconnecting people with the policymaking process might be direct democracy; frequent referenda along Swiss lines. Another might be to become familiar with expressing all policy goals in terms of outcomes that are meaningful to ordinary people, and to reward achievement of these outcomes, whoever achieves them and only once they have been achieved and sustained. By doing this, we could avoid today's corrupt favouritism of corporations or government bodies and de-emphasise the roles of political parties and their supporting donors and ideologues. Worthy though these aims might be in themselves, an outcome-based regime would, more positively, stimulate diverse, adaptive solutions to our urgent and large-scale social and environmental problems.

That's where Social Policy Bonds could enter the picture. They offer a way of achieving outcomes that rewards efficiency in achieving social goals above all other considerations. They inject market incentives into the solution of our social problems, impartially, with cost-effectiveness being the sole criterion for one approach being rewarded rather than another. A bond regime, because it would be efficient at achieveing social goals, and because its aims and means would be comprehensible to people other than politicians, bureaucrats, corporate lobbyists and think tank ideologues, could close the ever-widening gap between citizens and their government.

15 November 2013

Only 40% of citizens in the mostly-rich countries of the Organisation
for Economic Co-operation and Development expressed confidence in their
national governments in 2012, down five percentage points from 2007. Eroding trust in government, 'The Economist', 15 November

Brazilian Roberto Unger is a leading political
philosopher and an advocate of progressive politics.He has taught at
Harvard Law School for about 40 years and US President Barack Obama was
one of his students in the 1980s. "There is no project in the United
States responsive
to the needs and aspirations of the broad working class majority of the
country," said Mr Unger. Obama's law professor on his failures as president, Quote from BBC 'Hardtalk' programme, 15 November

It's not really surprising. Our governments have every incentive to respond more to corporate donors than to ordinary people. Big business and government have interests that grow ever further apart from those of the public and small businesses. They can get away with this because policymaking focuses on funding, institutional structures, legalistic debate and arguments about inputs, outputs or activities. Everything except meaningful outcomes in fact.

There is another way. A Social Policy Bond regime would subordinate all debate and decison-making to outcomes: what social and environmental goals should we be aiming for, and how much are they worth? These answers to these fundamental questions, ignored by the current system, would inform every project, every initiative and activity, launched under a bond regime. Apart from the incentives and efficiencies that the market for Social Policy Bonds would stimulate, the aims of the bonds would be explicit and clear to everybody. People might disagree about their relative priority, but they would know exactly what their government was trying to accomplish. Ordinary people could participate in policymaking and would engage with the inevitable trade-offs that have to be made when it comes to allocating society's scarce resources.

As a result, and crucially, we'd buy in to policy goals; perhaps not wholeheartedly but certainly more than we do today. Without such buy in, it's difficult to see how our governments, with their priorities so different from ours, are ever going to engage with the crucial social and environmental problems of our time, let alone solve them.

12 November 2013

Our boundless ingenuity, our immense technological knowledge: where are they being directed? Towards solving the problems that plague humanity? I refer to things like the piling up of nuclear weapons, catastrophic environmental disasters, murderous religious fanatiscism.... Well, no. Some, perhaps, most, of our best brains are going into answering this sort of question:

How will regulations
impact the way traders are capturing alpha? Would there be restrictions
that can possibly harm algorithmic trading? ... What is
the outlook for the markets when all participants engage in the arms
race of super smart algorithms? Where will institutional and retail
investors find opportunities? Conversely, could we imagine a world without high-frequency trading?

Yes, we are all relieved to know that the High Frequency Trading Leaders Forum 2013 - you know, the one that 'Every Trader and Quant in London is Talking About' - is to be held in London on 5 December. These traders and quants are some of the most brainy people there are. Hitched up to supercomputers these geniuses make a lot of money for themselves and their employers.

I can't condemn these people, whatever the net results of their collective actions. These people are reacting rationally to the incentives on offer. It's the incentives that are perverse. If people can make enough cash to bring up a family by shaving off one millisecond per financial transaction more than the next guy, then that is what they will strive to do. It just strikes one as sad that we don't have systems in place that would channel these bread-winners' undoubted immense ingenuity into more socially useful activities.

That's where Social Policy Bonds come in. Their tradability means that a bond regime can target broad, long-term goals that require diverse, adaptive approaches the nature of which we cannot currently conceive. The existing policymaking system deals with these goals, which include things like avoiding catastrophic disasters, stabilising the climate or even improving world or national health, haphazardly, if at all.

Of course, quants and other high-earners possibly do contribute more to tax revenues than ordinary people - especially if they are badly advised. But, as we can see, governments generally don't do a great job at deploying this revenue to deal with long-term, large-scale problems, like avoidance of conflict or climate change. Again, their incentives to do so are minimal and mostly focus on power; retaining it, or acquiring more of it.

A Social Policy Bond regime would allow us to target broad global and national goals explicitly, while channeling the market's efficiencies into the best use of our limited resources. Given that the survival of the planet itself is under threat, I think the case for such targeting is a strong one, even if we have to give up high-frequency trading to get there.

07 November 2013

The United Nations says it is “less and less likely” that global
greenhouse gas emissions will be low enough by 2020 to stop the
atmosphere warming beyond the internationally-agreed safety threshold –
2°C above its pre-industrial level. A report by the UN Environment Programme says current undertakings by
world governments to cut emissions fall short of that goal, and
emissions “continue to rise rather than decline”. Source

No surprise. If world governments were serious about doing something to moderate climate change, they'd reward people who help moderate climate change. Instead they have agreed on an elaborate, expensive, divisive and ineffectual policy of hand waving. The relationships are too obscure, or can be made to appear so: cutting greenhouse gas emissions might reduce climate change. But it might not. Even if it does, any benefits are likely to be minuscule. The costs are immediate, the benefits obscure and remote. It's not happening and it's not going to happen.

There'd be more popular support for targeting climate change directly. Under a Climate Stability Bond regime we could define our goal in ways that encompass an array of indicators: physical, biological, financial, so that all targeted conditions would have to be satisified and sustained before taxpayers become liable. We could choose to target goals including the reduction of casualties from adverse climatic events - something that ordinary people can understand and with which we can identify.

Apart from being comprehensible, the other big advantage of a bond regime is that it would channel resources into where they will be most effective at achieving our climate targets. It would encourage diverse, adaptive approaches, of the sort that Kyoto, with its fossilized science, cannot. And we are going to need diverse, adaptive approaches: the scientific relationships are too uncertain, and our knowledge expanding so rapidly, that any approach that focuses exclusively on just one variable (like the concentration of the few compounds identified as greenhouse gases twenty years ago) is going to fail. And it would fail even if it enjoyed support that took the form of actually doing something about it.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image in the panel below to download a 2400-word article published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

Social Policy Bonds in the media

25 May 2018: a short article on Social Policy Bonds and their possible application in India, appears on Market Express (India). It is by Dr Ashok V Desai and titled Incentivizing welfare.

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.